Deirdre McCloskey on the Chinese Economy: The Great Enrichment

Deirdre McCloskey poses for a portrait in her home Friday June 3, 2016 in Chicago, Ill.

Deirdre McCloskey, Distinguished Professor of Economics, History, English, and Communication at the University of Illinois at Chicago, explains the causes of the wealth of the modern world.

China led the world technologically in the early 15th century, yet Europe surpassed it overnight. How did this come about? Maverick economist Deirdre McCloskey offers an answer in her work. Although in her youth she fell under the sway of socialist economists, she brings an iconoclasts’ view to her subject believing it is wrong to limit the achievements of humanity to academic theories concerned solely with maximization of utility. Her latest book, Bourgeois Equality, is the concluding volume in a trilogy that seeks to explain “The Bourgeois Era,” which she believes laid the basis for the material and spiritual wealth enjoy by the modern world.

Q. Understanding the “Great Enrichment” is the central quest of your work over the last twenty years. What exactly is the Great Enrichment?

A. Since about 1800, the world has witnessed astonishing economic growth with per capita income increasing by a factor of 10. That’s not 10 percent, that’s 10 times more bread, pens, education and whatever since 1800. For countries like Australia, Germany and the United States that have been able to take greater advantage of modern innovations, it is more like a factor of 30—or on the order of 3000%.

It is the Great Enrichment and what is remarkable about the wealth explosion is that, despite the rise and fall of civilizations and empires, it had never happened before. Throughout history, ordinary people in Africa, Asia and Europe lived on the modern equivalent of an average of $3 a day. In good times, such as in early modern Europe or the Song Dynasty in China, that amount might double, but one bad harvest or natural disaster could plunge a community back into abject poverty.

It changed in the last two centuries and our recent ancestors saw the daily average rise to an astonishing $33 worldwide. But even that much improved world average does not come remotely close to the $100 a day or higher that more than two billion people enjoy today in lucky countries such as Australia.

Q. What explains this unprecedented economic growth?

A.Economists and historians on the left argue that it came from exploiting slaves or workers, or from imperialism. Those on the right say it comes from material investment, thrift or trade. But the numbers are too big to be explained by zero-sum theft or routine savings and investment, so materialist explanations don’t really make much sense.

Classical, Marxist and institutionalist economics fail to explain the Great Enrichment because they are determined to believe that economic results must have economic causes. Yet, if true, why hadn’t such an explosion in wealth occurred before? Trade, investment, exploitation and the rule of law have all been present in various combinations throughout history. What was different around 1800 that sparked the Industrial Revolution? I say the Great Enrichment was caused by…innovation, innovation, innovation.

Q. In what sense did innovation cause this change and how did it come about?

A. Innovation was made possible by a change in rhetoric and values. In pre-bourgeois Europe, the concern was exclusively maintaining order. Power was centralized in the aristocracy and guilds and the whole society looked down upon commercial pursuits. In those days, the very term “innovation” had a negative connotation, because innovations could upset the established order.

But, first in the Netherlands between 1568 and 1688, and then in Britain, virtues were redefined, creating a new dignity and liberty for the emerging middle class. Such changes in the mind and in the heart created an amazingly favorable climate for innovation. It led people to find novel ways of doing things with new machines and new institutions, such as the founding in 1810 of the University of Berlin, the first modern university. The fresh attitudes fostered a wealth of ideas that went crazy in the early 19th century. It has continued, to the benefit of billions of people, and soon the whole world.

Q. China has come relatively late to the Great Enrichment. Where does the country stand now?

A. The developments have not occurred in every part of the world to the same degree, but as the case of China and now India show, such developments can occur in extremely poor places. While middle class incomes have stagnated in western countries in recent years, the big economic story is that China and India are finding their way out of poverty, which is giving hundreds of millions of people the chance at radically fuller lives.

The key in China is, as elsewhere, that the government stopped doing things like The Great Leap Forward and the Cultural Revolution. After 1978, the Chinese government started doing what governments are competent to do, namely make private property work, build roads, ports and sewers and then got out of the way so people could take advantage of them.

It turns out that if you enable people to have a go, as they say in English, you unlock their ingenuity and they get on with building, trading, inventing and improving things, and testing such “betterments” through competition. Ultimately, having a free society is better for the ordinary people, and even for the old elite who become richer than they ever imagined possible. A major beneficiary of the prosperity of London is the Duke of Westminster.

Q. The rise of China has accompanied a growing fear, at least in the West, that the West is declining, is this a valid concern?

A. It is complete nonsense, yet people keep saying it. The late Samuel Huntington, a political scientist, went on about it in his book The Clash of Civilizations, for example, stoking populist fears that have borne fruit in Donald Trump.

Q. Yet, people like Robert Gordon in the Rise and Fall of American Growth seem to have solid evidence that innovation and growth is set for long-term decline.

A.No, Bob’s argument in mostly pessimistic baloney. I am optimistic and on good grounds. Bob considers the United States to be the economic world. Similar ill-documented pessimism appears in many books, back to Noah and the Flood. People seem to like to be told that the sky is falling. It isn’t. Another example is Tyler Cohen in Average is Over and his central chart showing a fall in the share of income going to labor in the United States. You look at that chart and think, “My god, how sharply it has fallen over the last twenty years!” But when you look closely, you realize it has only fallen from a 63% to 61% share of national income. It is negligible, and in recent years has begun to reverse.

The pessimists make the same mistake of only looking at the US, Britain or the West rather than looking at the world. China and India represent 40 percent of humanity and they are growing at fantastic rates. The West is not getting poorer, rather emerging countries are getting richer, which is beneficial to us all. If we keep our wits about us, economic growth can continue as long as we don’t shoot ourselves in the foot politically, as in Europe in 1914, which derailed economic growth and development for decades.

Q. But Chinese economic growth is slowing. Should we be concerned?

A. China is still experiencing rapid growth of around seven percent a year—although admittedly the numbers are suspect, anyone who goes to China knows that it is still growing very fast by modern standards. My concern with China is not slowing growth. China is like the man riding a tiger. As the country grows in wealth, people will demand more freedoms, as they did in Taiwan and South Korea. How will the government handle it? It you get off the tiger, you get eaten. It can work out, as in the case of South Africa. There the National Party dismounted the tiger successfully—there was no civil war. China can dismount safely if it is clever.

Q. One big recent political theme has been trade, the rolling back of globalization and a continuation of “China is taking our jobs” complaint. How do you see this?

A. More nonsense. Donald trump thinks trade deficits are a sign of weakness, butask yourself: are you weak because you have a trade deficit with your grocery store? Of course not. Tariffs hurt ordinary people. People usually think that the more complicated and developed your economy is, then the more your government should regulate it with tariffs and licenses and regulation and the rest. This is the opposite of the truth. The more complicated an economy is, the less the government can sensibly intervene.

I also find it curious that in the 1980s the West was worried about the Japanese economy and trade friction and today it is the Chinese. There has never been outrage over the masses of foreign investment in the United States by, say, Britain and the Netherlands.

Q. Are you saying there is a racist component to this?

A. It walks like a duck and quacks like a duck. It is a fear of the two Oriental nations—the Asian menace revisited! People have a deep confusion between political power and economic power, thinking that power to do violence leads to economic plenty. The idea for example that by investing in a country, you are taking it over politically is mistaken. In a trend of reverse outsourcing, the Chinese are now building factories in Kentucky, North Carolina and Virginia and Americans are getting benefits in terms of jobs – where exactly is the problem? If we in the United States suddenly decide to take over China’s investments in the US, who is stop us?

Q. So, what does the future hold?

A. I am optimistic on good grounds. In the past few decades in China and India, literally billions of people have found their way out of the worst of poverty. I expect that within two generations the Chinese will have comparable living standards to the West. It may take a generation or two longer in India, but it will also happen there. The innovation that powers the Great Enrichment is the best secular thing to happen since the invention of language. It is the greatest welfare program and has raised the wretched of the earth to enjoy the best conditions for human life ever. It will continue. In the next 100 years, more and more countries will take advantage of it—you can already see it happen in, of all places, sub-Saharan Africa. Welcome to a future of world prosperity and the cultural explosion it will make possible!

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